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The best-performing ASX stock of 2015, ResApp has joined the list of biotech stocks suffering an embarrassing – and surprising – clinical setback.

ResApp had developed an app-based algorithm that enables patients with respiratory diseases to literally cough into their phone for a diagnosis. Given the rise and rise of telehealth, investors soon cottoned on to the huge potential.

After being in trading halt for seven days – always a suspicious sign – ResApp on August 9 released the broad results of a US clinical study across three hospitals called SmartcoughC, involving 1245 patients aged between 29 days and 12 years.

The results were a shocker, contradicting those of previously positive studies carried out at Perth’s Joondalup Health Campus and Princess Margaret Hospital.

While the US study aimed at a 75% effectiveness rate, the results were as low as 35% for positive diagnosis of asthma and reactive airways disease. The results were compared with a traditional X-ray analysis, blood test or a doc with a stethoscope.

The results for negative confirmation – confirming a patient did not have a certain disorder – were not much better.

Two smaller Perth trials for adults and children claimed detection rates of up to 100%, with nothing below 89%. An Indonesian-based trial, funded by the Bill and Melinda Gates Foundation, was equally impressive.

“These are not the results we expected given our experience in Australia,’’ says ResApp chief Tony Keating. “It’s obvious that a large number of tests have been affected by procedural anomalies and we now need to go through each case one by one to fully understand the results.”

“Procedural anomalies” included some patients being treated before the cough test, “contrary to instructions and training.”

Some cough recordings also had unacceptable background noise and interference, including coughing from third parties in the room.

ResApp now aims to repeat the study with some refinements, as well as launching an adult study during the coming US winter. Each trial is expected to cost $2.5m to $3m. “We have $8m in the bank and I’m glad we do,” Keating says.

The company is also pondering going ahead with a Food & Drug Administration approval application for bronchiolitis, the only application to score passable detection grades of between 80% and 95%.

ResApp’s setback has parallels with the near-fatal experience of Innate Immunotherapeutics (ASX:IIL), which held high hopes for its multiple sclerosis drug with the backing of US Republican investors.

The drug had already been made available to needy patients, who reported benefits. But in June a 93-patient local trial showed “no clinically meaningful or statistically significant differences in measures of neuromuscular function or patient-reported outcomes.”

As with Innate shares ResApp stock was poleaxed on the day, losing 77 per cent of its value but regaining ground the next day after a reassuring briefing.

ResApp shares listed via the backdoor in July 2015, with $4m raised at 2c apiece. The stock peaked at 53c in September 2016, a 1275% gain for the smarties who picked the top.

The moral of the story for investors is that when comes to clinical studies, the dangers increase the more expansive the trials become.

The lesson for patients is the stethoscope-wielding doc remains the best way to diagnose respiratory diseases, which account for the lion’s share of GP visits.

Many readers will remember Boreham as author of the Criterion column in The Australian newspaper, for well over a decade. He also has more than three decades' experience of business reporting across three major publications.

Tim Boreham has now joined Independent Investment Research and is proud to present The New Criterion, which will honour the style and purpose of the old column. These were based on covering largely ignored small to mid cap stocks in an accessible and entertaining manner for both retail and professional investors.

Disclaimer: The author nor Independent Investment Research have received a fee or any kind of inducement for this article. The New Criterion is not intended as specific investment advice and readers should contact a licensed financial adviser.